Salient terms of the ESOP

To enable shareholders to understand proposed amendments to the ESOP, the relevant salient terms of the ESOP are set out below.

At the company’s annual general meeting held on 1 December 2010, shareholders approved the implementation of the ESOP via a trust called the Harmony Employees’ Share Trust (trust).

• a total of (i) 4 288 000 ordinary shares in the share capital of the company (scheme shares) at par value and (ii) 8 576 000 SARs will be offered to 33 567 Harmony qualifying employees (qualifying employees) in the ratio of 1 scheme share: 2 SARs, subject to the terms and conditions of the deed of trust (trust deed);
• the scheme shares and SARs will vest in qualifying employees in five equal tranches over a five-year period (ie one-fifth each year);
• upon the vesting of SARs, each qualifying employee will be entitled to exercise the vested SARs (exercise); and
• following the exercise of the vested SARs by a qualifying employee, the qualifying employee will be entitled to receive a number of ordinary shares in the share capital of the company (shares). The number of shares which a qualifying employee will be entitled to receive will be determined by reference to the appreciation of the share price between the offer date of the SARs (offer date) and the date of exercise (exercise date). To the extent that the share price depreciates between the offer date and the exercise date, the qualifying employee will not be entitled to any shares in respect of the vested SARs and the vested SARs will be cancelled.

Rationale for the proposed amendments to the ESOP

Following approval of the ESOP by shareholders, the ESOP was not implemented given concerns raised by the majority union, the National Union of Mineworkers (NUM), over the risk attached to the SAR component of the ESOP. The concern lies in the fact that, currently, the only guaranteed value transfer to qualifying employees is in the form of the free scheme shares component of the ESOP. As a result the value of the SAR component of the ESOP is not certain since it is entirely dependent on the performance of the company’s share price in future (ie in the event that the share price depreciates between the offer date and exercise date, qualifying employees will not receive any value for their SARs).

Recognising that one of the purposes of the ESOP is to align the interests of employees with that of shareholders, and in the interests of maintaining good labour relations, management has consulted with NUM to address this concern. The negotiations have culminated in a proposal which, if implemented, will not result in further dilution to shareholders and will ensure that qualifying employees realise a reasonable minimum benefit in respect of the SAR component of their ESOP. To reduce the cost impact of the proposed minimum benefit, the proposal further envisages that potential upside on the SAR component should also be capped by introducing a maximum benefit payout by placing a ceiling on the share price appreciation.

Proposed amendments to the ESOP

• in the event that there is a depreciation of the share price between the offer date and exercise date, qualifying employees will not receive any shares in respect of their vested SARs (as is currently the case) and the trust deed will be amended to provide that the company will make a minimum cash pay-out of R18 per SAR to each qualifying employee;
• in the event that the share price appreciation between the offer date and exercise date is less than R18, then qualifying employees will receive shares equal in value to the appreciation of the share price and the trust deed will be amended to provide that the company will make an additional top-up cash payment to qualifying employees to ensure that a minimum value of R18 per SAR accrues to each qualifying employee; and
• in the event that the share price appreciation is more than R32 between the offer date and exercise date, the trust deed will be amended to provide that the number of shares which a qualifying employee will be entitled to receive will be capped at share appreciation amount of R32 (in other words, the share price appreciation will be capped at R32 per SAR).

The proposed amended trust deed will be available for inspection by shareholders from the date of this notice to the date of the annual general meeting, during normal business hours at the company’s registered office.